6 Ways to Put Your 2011 Payroll Tax Break to Work

by Darwins Money on 6 January 2011 6 comments

With Congress and President Obama having put their stamp of approval on the 2011 tax deal, a major component of the legislation affecting virtually all working Americans is a change to the payroll tax. Historically, employees were subject to a tax of 6.2% of earnings up to a cap, which is $106,800 for 2011. In order to help stimulate the economy and achieve a compromise on tax breaks, this payroll tax has been reduced to 4.2% for 2011, effectively giving everyone a 2% raise on their first $106,800 earned (so a full 2% raise for most of us!). With this new-found bonus for 2011, are you going to just let it melt into your budget and spend it blindly (which is what the government intended) or strategically allocate this money to a specific objective or cause?

Increase Your 401(k) Contribution

This is what I'm doing. I went into my 401(k) account first thing and immediately increased my contribution by 2%. Since we were making do with my take-home pay last year, I figured by automatically directing the extra 2% right to my retirement account, we wouldn't even notice the difference. Who knows, if I get a decent raise this year, maybe I won't even have to back it down again in 2012 when the 2% break expires.

Build Your Emergency Fund

With so few people having a sizable emergency fund for layoffs or life events, it's worth considering shifting some extra funds into a dedicated emergency fund account (for more, see "Figuring the Size of your Emergency Fund").

Pay Down Debt

Allocating an additional 2% monthly to existing high-interest debt may be a better use of your funds than any other options presented, especially if you're talking about credit card debt with an interest rate over 20%.

Give It Back

Many people are frustrated with the constant government giveaways and don't feel they actually deserve or need this tax break. As a result, they're giving the money away. For instance, some professors started a website that allows "the rich" to give back tax deductions in the name of job creation at Give It Back for Jobs. If that's not your fancy, surely there's a local cause or favorite charity where you could direct an equivalent amount from your payroll tax break.

College Savings

With young children, setting aside just a few thousand dollars a year goes a long way in helping to offset the costs of college. Presently, the most popular option is the 529 plan (see this 529 plan article on the benefits of the pre-paid tuition vs. self-directed investment options).

Invest in Your Home with Green Upgrades

Perhaps you've been putting off that new energy-efficient front door or replacing a few windows. Well, part of the 2011 tax deal is also an extension of some portions of the energy tax credit. While the credits aren't as attractive as they were in 2009 and 2010, you can still save a few hundred dollars on an energy upgrade for your home and realize the longer-term benefits of lower costs moving forward.

What are you going to do with your 2% raise?

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Guest's picture

Unfortunately for us, they jacked up our health care premium by double what we were paying in 2010, and did this alongside not giving out any raises or bonuses for the year. So, our 2% tax break vanishes in paying the additional premium.

Bummer.

Darwins Money's picture

Wow, what a bummer. And then in 2012, they'll jack 'em up again and the payroll tax holiday is gone. Sorry to hear - and the government keeps saying there's no inflation?!?

Guest's picture
Coinmaser

The 2% savings is going for higher gas prices, health insurance, and other taxes including State and Restate Taxes.

Guest's picture
bluidqt

Unfortunately my health insurance, dental insurance and life insurance premiums all went up so when I received my first payroll check this year the 2% and then some is gone! Not to mention fuel prices, food prices etc keep rising. Sure seems prices on almost everything keep increasing and my salary isn't keeping up. I am still going to see if I can put an additional 2% into my 401K, emergency fund or something though!

Guest's picture
Janet

Good ideas! Much better than squandering the extra money. I may have to automate the extra pay to go into an emergency savings account. I can't trust myself when I'm around cute shoes and outfits not to buy ... but if I never see the money, it's less of a sacrifice.

Guest's picture
Nate

I really like the idea of paying down your debt with this extra money. Who doesn't have debt these days? If you were getting by with your old paycheck, it only makes sense to contribute this 2% to getting out of debt. Especially if you're married and have two incomes. Then you're talking 4% towards debt that wouldn't otherwise be there. I hope people realize this opportunity and take advantage of it while they can!